In my May 2019 column titled Meal kits, food delivery and the death of the kitchen, I wrote about the popularity of food delivery apps that were emerging as utilities, in some cases even replacing kitchens with fully cooked meals or partially prepared meal kits.
Companies like Uber Eats, DoorDash, Postmates, GrubHub in North America, JustEat Takeaway and DeliveryHero in Europe, Deliveroo in UK and Australia, Meituan in China and the likes of GrabFood, Foodpanda and their ilk in Southeast Asia were delivering great value for customers even as they destroyed shareholder value.
“Nobody is making money in food delivery,” I wrote at the time, predicting that it was indeed highly unlikely that anyone would ever make money unless there was massive consolidation in the space that upended the economics of the business.
Two years on, the meal delivery business has dramatically grown in the aftermath of the pandemic’s rolling lockdowns. Moreover, there has been a lot of consolidation in the sector. But as the world starts to open up in the wake of soaring vaccination rates, the food delivery business faces its moment of truth.
Can it finally turn a profit? Or will the economics of the business deteriorate as more people go out and eat in restaurants again instead of giving UberEats, Foodpanda or Meituan guys a huge trip for braving the lockdown and delivering a few dishes to their doorsteps?
Food and grocery delivery apps process and send orders directly to partner restaurants or grocery stores and their delivery drivers bring the meals or bags of groceries to your home. These apps earn money by charging restaurants and grocery stores a percentage of the order and customers like you and me, a service fee.
The pandemic accelerated the trend of ordering food or groceries rather than venturing out with a mask and socially distancing ourselves from other shoppers to avoid Covid-19. Many urban white collared households had higher disposable incomes during the pandemic because they saved on commuting while working from home and avoided eating outside. Some spent part of the savings to occasionally order from food or grocery delivery firms.
Unviable business model
Here is the problem: Food and grocery delivery is probably one of the worst business models in the world. Though DoorDash, UberEats, GrubHub and others saw a hefty increase in revenues, their operating expenses are growing faster than the increase in revenues.
The meal delivery firms have to pay drivers, set aside money for marketing and promotions and an array of administrative or operating expenses including refunds to customers. In a recent Deutsche Bank report on food delivery noted that DoorDash, which raised US$3.4 billion ($4.5 billion) in its initial public offering (IPO) last December, last year made just 90 US cents on an average food order of US$36. That is a gross margin of 2.9% in a record-breaking year for food delivery when much of the world was under a lockdown. In a more normalised year like this one, companies have to fork out more money to entice drivers.
Clearly, the economics of food delivery just does not work.
Less than 15% of North American households regularly use a meal delivery service. At the height of the pandemic, on a good day that might have gone up to say 20%, possibly slightly higher, but the point is majority of households still do not order food from the smartphone apps. They would rather cook at home.
UBS estimates that global online food delivery in top 14 markets is likely to double between January last year and the end of 2024 driven by greater order frequency, cultural shifts and growing average order values. Unfortunately, deteriorating economics of meal delivery means the math just does not work.
If you think the food delivery business is bad, you need to look at the grocery delivery business which is far worse. At the height of the pandemic last year, I tried Instacart, the biggest grocery delivery firm. To get stuff delivered from my favourite supermarket, Instacart was charging me a total of $14, plus taxes, for $40 of groceries for one-hour delivery. I was also expected to give the delivery a big tip as well. After three or four orders, I vowed never to use Instacart again.
‘Ghost kitchens’
Delivery-only ghost kitchens or virtual kitchens, which are also called cloud kitchens or dark kitchens, are one way to cut costs and improve meal delivery economics.
Ghost stores may be a way to cut grocery delivery costs. People will not pay $15 in delivery charges to get $40 worth groceries. But if you can eliminate the delivery charges and get the groceries to their home in 15 to 30 minutes, they might be tempted to use an app than go to a supermarket.
Last week, Missfresh — an online grocery delivery unicorn which operates as Meiri Youxian in China — filed its F-1, the registration form for foreign companies that want to list in the US ahead. Backed by Tencent Holdings, Goldman Sachs and venture capital firm Tiger Global and Abu Dhabi Capital, Missfresh now has over eight million affluent urban households as users and operates 650 “distributed mini-warehouses” in 16 major Chinese cities that allow it to source items from farmers directly.
Speed is key
In many Chinese cities, Missfresh can get you groceries in 20 to 25 minutes. Last year, despite Covid-19 restrictions across China, it chalked up an average delivery time of just 39 minutes. With the goal of disrupting the traditional grocery shopping model, Missfresh which will list on Nasdaq next month now aims to cut delivery times in most cities to under 30 minutes.
As a user of both food and grocery delivery apps, the key I believe is ultra-fast or ‘super delivery’. In the post-Covid-19 world, customers will not pay a huge premium for food that is delivered 30 minutes to an hour after it is ordered or wait two to three hours for groceries.
But if you can get me something in 15 minutes, I do not mind paying extra five or ten bucks. Last week, JOKR — a new speedy grocery delivery service — launched in parts of New York. It was founded by serial entrepreneur Ralf Wenzel — who co-founded Foodpanda — the popular Southeast Asian food delivery app and helped lead its global expansion ultimately merging it with German competitor Delivery Hero in December 2016.
JOKR promises to be the future of on-demand grocery delivery by getting you that chicken sandwich, ready-to-heat pasta, carton of milk or bunch of apples indeed a fairly wide selection of products that you might find in the local deli or convenience store, in just 15 minutes or less. And, oh, there are no order minimums like many of the grocery or food delivery Apps and absolutely no delivery fees.
Want one carton of fresh milk and strawberries or grapes delivered to your home? Most apps will either reject the order our tell you that you need to order some more stuff to go with it before they can deliver. Not JOKR.
Here is how ultra-fast 15 minute grocery delivery works: JOKR builds micro-hubs storefronts on side streets in denser urban areas like New York. Essentially these are ghost stores, akin to ghost kitchens in food delivery, which use data to forecast what customers in that neighbourhood want and when, and then strategically place these micro-fulfilment centres for speedy delivery.
Think of these as mini markets but carrying far more goods that can be quickly dispatched to people in the area. Algorithms predict local behaviour and buying patterns. Let’s say you live in New York neighbourhood which is predominantly Asian — Chinese, Japanese or Koreans, for example.
That area would have high demand for bags of rice or packets of ramen or kimchi. In an affluent neighbourhood, there would be higher demand for high priced items and in poorer areas there is higher demand for low priced merchandise.
JOKR has been operating across Latin America — in key Brazilian cities like Sao Paolo, the Peruvian capital of Lima and in Mexico City for several months before its New York launch. It raised money from Japan’s SoftBank Group, German venture capital firm HV Capital and Silicon Valley investor Tiger Global.
Wenzel stumbled on a ghost kitchen idea when he was working for Foodpanda. After the firm was sold to Delivery Hero, he decided to use the ghost kitchen model to build ghost stores for groceries. To cut delivery times, JOKR focused on being as near to its customers as possible. If it cannot deliver in 15 minutes, it will not take your order.
Meeting demand
JOKR is basically a data-centric app that uses artificial intelligence to identify not only what the customer wants and when he or she may want something but also what the company’s micro-fulfilment centres might need to meet the neighbourhood’s demands.
Early in the morning, demand for milk, toothpaste or toothbrush or orange juice might be high while late in the evening items like ready to cook pasta or ramen, fresh fruit and beer cans might be higher. The app’s algorithms build a dynamic inventory and catalogue management system that is able to replenish and rotate inventory or pre-forecast suggestions for customers.
JOKR procures the goods it sells directly from brands, manufacturers or wholesalers to keep its costs low. That is why JOKR has been labelled as a ghost kitchen of sorts for groceries and everyday items.
Instead of relying on delivery charges like Postmates or Instacart, JOKR generates revenues from a small margin on its products. “Our ability to procure directly, and cut out middlemen like wholesalers, distributors or supermarkets, allows us to tap into a margin pool that is higher than that of traditional online marketplaces, which only pick a product from existing stores, supermarkets, and then add a delivery fee in order to make their proposition work,” Wenzel was quoted as saying at the New York launch last week.
And, oh, instead of relying on part-time riders like UberEats, Foodpanda or GrabFood, JOKR’s delivery people are full-time employees. And because they deliver within a small radius in an urban neighbourhood, these delivery guys tend to know their customers.
Few companies globally have been able to execute on delivery — e-commerce giant Amazon is already doing same-day deliveries in many cities. Amazon is not in the food delivery business but it has a 7% stake in UK’s Deliveroo, which should help its foray in the sector. Meanwhile, DoorDash and others are experimenting with robots that glide along sidewalks to deliver goods.
Once you take away the cost of the driver, food delivery suddenly becomes a more viable business. Until then, food and grocery delivery firms will continue to raise more money to keep afloat.
Assif Shameen is a technology and business writer based in North America.
Cover photo: Albert Chua/ The Edge Singapore
